Thursday, October 29, 2015

4 Caveats to A Leverage Strategy

If applied on the right property investments and in the right market conditions, leverage is an excellent strategy. Check out this article from “DON CAMPBELL” a foremost Canadian authority on real estate investing. The numbers do not lie - if you pay particular attention to the investment illustration outlined.

But to guard against the ‘downside’, as you look to employ a LEVERAGE strategy, consider the following four “caveats”:

Source: Instphil
  1. Cash Flow is KING – ensure the tenant/revenue base is stable and secure. This includes the covenant of the tenants, lease terms, current occupancy levels, and debt service coverage on current income/expenses.
  2. Low Down Payment means HIGHER MONTHLY PAYMENTS – completing a deal with a low down payment, often becomes problematic if the monthly mortgage payment is beyond a comfortable level. If the market conditions deteriorate and vacancies rise, this problem often will only get worse and the monthly payment harder to meet.
  3. Projecting for APPRECIATION – markets do not always go up, despite recent trends, and you must be realistic in assessing this variable, both with respect to your own market and the specific properties being targeted. In a stalled or declining market, properties which have stable cash flows thrive and are insulated from a negative market.
  4. Maximum Leverage vs. POOR INVESTMENT – no money or low down payment deals on a poor investment property, typically leads to negative results. Do not let attractive leverage opportunities, compromise your ability to stay the course on targeting good property investments.
Leverage is a great strategy, but it requires sound discipline in its application.

Tells us about your use of leverage in your market. Again, we love to tell you about our own backyard here in Windsor-Essex, so feel to reach out to us!

Mark Lalovich
Office: (519) 966-0444
Cell: (519) 259-5434

Monday, October 26, 2015

The Truth About Condo Fees

Often we hear people say, “I’m not interested in buying a condo because I don’t want to pay condo fees.” Or sometimes condo owners tell us, “I pay these condo fees every month but don’t know where the money goes.”

Well, today we are going to discuss condos and where those monthly condo fees go!

First a technical definition of a condo:

A condominium, frequently shortened to condo, is the form of housing tenure and other real property where a specified part of a piece of real estate (usually of an apartment house) is individually owned. Use of land access to common facilities in the piece such as hallways, heating system, elevators, and exterior areas are executed under legal rights associated with the individual ownership. These rights are controlled by the association of owners that jointly represent ownership of the whole piece.

Put simply, when you own a condo, you own the square footage inside your unit, and are entitled to use the common areas of the building. This common element is managed by a condo corporation within the building. This condo corporation basically runs the operation and the finances of the building. Every unit owner is obligated to pay their share of the operating costs of these common elements of the building and condo fees are how that is administered.

Source: See Windsor Real Estate

Typical Expenses Incurred By Condo Corporations & Funded By Condo Fees:

  • Utilities of common areas
  • Maintenance of common areas
  • Management of the corporation and building
  • Safety/Security (Cameras/concierge in some buildings)
  • Garbage/Recycling
  • Landscaping/Snow Removal
  • Insurance
  • Allocation to the Reserve Fund (which is a topic we will discuss in depth in an upcoming post)
In other words, you are paying for the convenience of walking into your unit at the end of a long day, and having no worries outside of keeping up the interior of your unit. You also don’t need to budget for upcoming capital items the way you would in a house (like a roof) as that is built into your reserve fund allocation (unless the reserve fund is underfunded and a special assessment comes in, which we will also discuss in another post).

This works well for certain people, namely younger and older people, because it allows them to budget consistent costs for housing and not have to worry about maintenance.

To summarize, you aren’t throwing money out the window when you pay condo fees. You are paying your proportionate share of the operating (and future) costs of the property.

Were you part of the percentage of people who already knew this about condo fees? Leave a comment to let us know.

Next up we will be talking about reserve funds – a topic that confuses lots of buyers.

Russel Lalovich
Office: (519) 966-0444
Cell: (519) 995-5620

Thursday, October 22, 2015

The World Of Leverage

No matter what market you are investing in across Canada, the principal of leverage (WHEN APPLIED TO THE RIGHT INVESTMENT PROPERTIES), has worked extremely well in recent years. Although there are many benefits, the primary ones remain –

  • Can significantly enhance the ROI of the property
  • Allows you to acquire additional properties & build a portfolio faster

Our definition for LEVERAGE remains the same – ‘the use of borrowed money to increase the return on an investment property’. It is considered a legitimate investment strategy, and one that is best suited for properties with both good cash flows and those having a good probability of future appreciation.

Source: Resi
A simple illustration highlights the concept in a growth market:


Purchase Price $200,000 (all cash investment)
Market Growth Projection – 3% per year
After Year 2 - $212,000
ROI – 6% (on cash invested)

2. 70% FINANCING – 1ST MORTGAGE OF $140,000

Purchase Price $200,000
Cash Investment $60,000
After Year 2 - $212,000
ROI – 20% (on cash invested)

Again, this is an illustration which is based on strictly price appreciation. There is no analysis of the property’s monthly/annual cash flow, which would typically come first. If in fact the property was actually sold after year 2, the total ROI would be even more in favour of Scenario 2, and the % difference greater.

On the matter of building a portfolio of properties faster, you can see by allocating $60,000 by property, you should be able to acquire ‘3 properties’ by leveraging your cash investment. The key is to work this strategy on the RIGHT INVESTMENT PROPERTIES.

Does leverage still work in a flat market (no growth)? Or a declining market (negative growth)? Tell us your stories, we’d love to hear them - both positive and negative. Call us anytime regarding our home turf here in Windsor –Essex!

Mark Lalovich
Office: (519) 966-0444
Cell: (519) 259-5434

Tuesday, October 20, 2015

5 Ways Housing Market Affected By Canadian Federal Election

With the Federal Election in Canada that happened recently on Monday, October 19th, there have been many headlines regarding Party promises. One of the hot button issues seems to be the housing market.

Today we will review some of the policies that have been put forth by the different parties and offer a few thoughts on each.

Source: CBC
1) The incumbent Conservative party has been the most vocal on the subject of home ownership, and on September 29th, Harper announced that his party is setting a target of creating 700,000 new homeowners by 2020. This increases the segment of the population that owns a home to 72.5% from 70%.

This has repercussions for the housing market dynamics. Obviously this would increase demand for purchases and decrease demand for rentals. All other things equal this would increase pressure on home prices and increase vacancy rates on apartments. Another item of note is relating this to the experience of the US in the 2000s as home ownership peaked at just under 70% and that lead to the eventual housing crash and has seen home ownership decrease to around 63%.

2) Increasing the Home Buyers’ Plan (HBP) from $25,000 to $35,000: This is the program that allows you to withdraw money from your RRSP, tax-free, if you’re buying your first home. The Conservatives have promised to increase the amount you can withdraw by $10,000, giving you more room to save for a down payment.

This makes a lot of sense considering many markets in Canada have seen rapid price appreciation and the $25,000 doesn’t go as far as it used to in helping for down payments. On the downside, it takes funds away (temporarily) from retirement savings.

3) Introducing a permanent home renovation tax credit: A temporary credit was introduced in 2009 to help boost the economy, and the Conservatives have now promised to make it permanent. The proposal would give homeowners a tax credit on home renovations costing between $1,000–$5,000.

This will encourage people to reinvest in their homes and boost the construction industry. People always seem to have home improvement projects they are wanting to do and this incentive might push them to pull the trigger. On the flipside, the timing of this might be wrong with home prices at all times highs.

4) Collecting data on foreign investment: As foreign investors continue to take the blame for Vancouver’s skyrocketing house prices, the Tories promise to get to the bottom of it. They’ve pledged federal money to pay for research that probably should have been done years ago anyway.

This is a complex issue but it is no doubt playing a role in the market. We are seeing this not just in the housing market but also in commercial real estate as international investors have rolled in. You don’t want to discourage investment in Canada but don’t want to price citizens out of their own markets either.

5) Creating $125 million per year in tax incentives for landlords: Part of the Liberals’ “social infrastructure” plan is a substantial tax break for developers and landlords to build and renovate rental housing. The plan includes a GST rebate and government-backed financing for purpose-built rental developments.

The apartment building stock has been aging in Canada for years as new construction hasn’t been economical. This could help change some of that, leading to increased rental supply as developers consider building apartments instead of condos.

Depending on how the election plays out, it is possible most or none of these policies see the light of day. But healthy policy debate is always good for our country.

What do you think of these policies and the federal election? Let us know in the comments!

To catch up on the election, click here.

Russel Lalovich
Office: (519) 966-0444
Cell: (519) 995-5620

Thursday, October 15, 2015

2 Things You Must Know When Investing For A Return

Investing for a return is a simple concept when it comes to real estate.  

1) In the case of income generating rental properties, a basic evaluation metric is to look at the property’s overall RETURN ON INVESTMENT (ROI). If we are considering the purchase of a ‘fully occupied 3 unit plaza’-  at a purchase price of $300,000  and a net operating annual income of $30,000  - the RETURN on the property is projected to be 10%. 

In other words, an investment of $300,000 will bring an annual ROI of 10%. Pretty impressive in today’s low rate environment.

2) But what happens to the return, when we look to arrange financing (a.k.a. mortgage) to buy this property? Using the same example –  say we arrange a new first mortgage at $200,000 @ a rate of 4% on a 20 year amortization.  Monthly mortgage payments are projected at $1208.50 per month ($14,502 per year). The Net Income (after Debt Service) is now reduced to $15,498, but so is our upfront cash investment (a.k.a downpayment) , to $100,000.  The ROI calculation now looks like this - $15,498 / $100,000 = 15.49%. 

Welcome to the world of LEVERAGE!

Source: 16:10 Financial
When analyzing the return potential of a property, these are the first two metrics to review.  In considering the financing options, it’s important do your homework on what is realistic and obtainable in your market. Key factors to consider include -  downpayment requirements, interest rates, amortization periods, commitment periods, preferred property types, open vs. closed mortgages, and upfront costs to arrange a new mortgage. 

Ensure you are dealing with qualified COMMERCIAL MORTGAGE SPECIALISTS, as you assess all factors relating to financing the property. 

In Windsor-Essex over the past 4-5 years, rates of return (aka Cap Rates) have compressed significantly – in some cases +2%. But the market has responded by accepting lower rates of return and the lenders have adjusted accordingly.  The key element for both investors and their lenders, remains the quality and sustainability of the cash flow.  

What’s happening in your market? Are quality INCOME properties hard to find? How are the lenders in your market?  Would love to hear from you on any comments/questions.

Mark Lalovich
Office: (519) 966-0444
Cell: (519) 259-5434

Tuesday, October 13, 2015

"The Rich Get Richer" Thanks To Real Estate

Recently we came across an article in which it is stated that the rich have been getting richer in the developed world due to owing real estate.  It struck a chord and is something that is hard to argue with.  Given our profession we can relate to these findings.

Through the day-to-day dealings of working in commercial real estate, we are often in contact with many successful entrepreneurs, business owners, professionals and corporate executives.  Luckily we are able to gain great insights into what makes these people successful in their business and financial lives.  Often a large component of their financial success comes from (owning) real estate. 

Whether owning the building their company is in, investing in residential or commercial income properties or simply owning their home,  a significant portion of their net worth is invested in real estate.  Over the long term being an owner of real estate assets has tended to work well.  With real estate prices being at all time highs in many different sectors and markets, this seems a relevant time for this discussion and we will piggyback off of the rich get richer idea, with some reasons why real estate assets have performed well over the long term and why the trend should continue into the future:

Source: Rich & Olivia
  1. They are hard, tangible assets.  Compared to buying financial assets - i.e. stocks or bonds, which are essentially paper assets - real estate has tangible value (you can live in it in the example of a house, or farm it in the example of farm land).
  2. Over the long term they are an inflation hedge, as rents and construction costs rise.
  3. Land is scarse and they aren’t making any more of it!
  4. The population is growing and with advances in modern medicine this doesn’t seem to be a trend reversing itself any time soon.
  5. You can use leverage to increase your returns or acquire assets that you don’t have the cash to pay for.  Financing options are also robust in developed markets.
  6. Historically low and falling interest rates.  Although no one can predict the future, even if interest rates rise substantially, they still would look like a bargain compared to previous cycles (hello 20+% in the early 1980s).
  7.  Continued innovation and technology to propel economic growth and therefore peoples' standard of living.
  8.  In the example of investment properties, they pay income, as opposed to some other asset classes such as stocks that don’t pay dividends or investing in commodities.  Good for retirees or people who live off of a nest egg and need the income.
  9. Easy to understand.  Whether it be residential prices in your neighbourhood, or prices for apartment buildings.  The concepts for valuation (comparables, cap rates) aren’t difficult to understand.  Some other assets such as stocks and bonds are more difficult for novice investors to understand.
What are your thoughts on the effect of real estate assets over time? Leave a comment down below.

Russel Lalovich
Office: (519) 966-0444
Cell: (519) 995-5620

    Thursday, October 8, 2015

    Windsor's Moving Up Against The Big Boys - New Series

    Source: National Post

    Great way to kick off our new series, COMMERCIAL PROPERTIES  – WINDSOR FOCUS.  

    Real Estate was hit hard during the 2007-2010 period, but since 2010 we have seen major moves across all sectors of our real estate market. 

    via National Post
    Just to highlight a few key areas –

    * Multi family vacancy rates are down below 4% (from 12% back in 2010)
    * Industrial lease rates on a per ft. basis (have increased 70-80 % since 2010)
    * Industrial building sales on a per ft. basis  (have increased similarly)
    * Residential sales activity (both new and resale) are turning over at unprecedented rates
    * Commercial Property interest and sales are in a significant growth phase given strong demand
    * Out-of-town investment into the Windsor market is at record levels

    What is the take away? 

    Windsor’s market offers a great upside for investors / developers / landlords and owner-occupants looking to acquire good (aka sound) real estate value.  Cap. rates are more attractive than other major Canadian markets, competitive financing terms are available, a good mix of products exist, and many new developments are either under way or on the horizon. The population is once again growing and the economic issues of 5-6 years ago are now in the rear view mirror.

    The Windsor Market is still in the ‘early innings’ and it is really just starting to make its move. Whether you are local or from outside of the area, give us a call and let us put our commercial expertise to work for you in Windsor – Essex.

    We love feedback so don't be shy about letting us know your thoughts and where we agree/disagree! Intellectual discussion is always welcome. 

    We are rolling out a new BLOG series, COMMERCIAL PROPERTIES – WINDSOR FOCUS, and we look forward to all your comments as we move through the last quarter of 2015. 

    Mark Lalovich
    Office: (519) 966-0444
    Cell: (519) 259-5434

    Tuesday, October 6, 2015

    How A Sold Windsor Multi-Family Portfolio Affects You

    For those of you that either own rental properties, or just generally follow the real estate industry in your region, you have surely noticed the froth of the market over the last several years.  

    With the continuation of historically low interest rates, investors of all sorts have been searching for returns in different asset classes and that has resulted in a hard charge into multifamily real estate.  

    With this increased demand, prices have been rising and cap rates (click here to learn more about a similar concept) have been compressing. 

    This seems to have come to a head this summer as Boardwalk REIT (Real Estate Investment Trust) has agreed to sell their Windsor multifamily portfolio to Skyline Apartment REIT.  This transaction turns Skyline into the dominant Landlord in the region with close to 2000 units.  Of note to market observers is the reported cap rate of 5.43% or $80,800 per unit.

    Illustration By Chloe Cushman/National Post

    Takeaways to Note From This Deal:

    1. Cap rate compression.  This is a new benchmark for the multifamily sector in Windsor as cap rates have never been this low.  This has major repercussions for the market as Sellers will try to adjust sale prices to reflect this favorable comparable.  Back in 2010, it was common place to see cap rates in the range of 10%.  Now those came with higher vacancy rates and a more difficult financing environment, but is telling in how far things have come in the last 5 years.
    2. Low interest rates continue to drive asset prices up as investors can still make money at these cap rates when they can borrow at less than 3% interest rates.
    3. Multifamily is considered a safe haven asset class, and as such, commands a premium relative to comparable properties in other sectors of Commercial real estate.
    4. Ability to finance multifamily properties remains robust, even as cap rates have compressed.
    5. Skyline is making a large bet on Windsor and must be bullish on the region long term, with regard to employment, populations growth, etc.
    6. Finding large multifamily properties for individual investors will become more and more difficult as the market is increasingly controlled by REITs such as Skyline and Timbercreek (to name a few in the Windsor market).
    7. There could be a pushback from Buyers at these cap rates as they view the market as priced for perfection and therefore higher risk.
    What do you think readers? What are your views regarding this transaction and how it pertains to the Windsor multifamily market?

    Russel Lalovich
    Office: (519) 966-0444
    Cell: (519) 995-5620